The allegra strategies

IS IT POSSIBLE TO CREATE AN EFFECTIVE AND PROFITABLE CUSTOMER LOYALTY PROGRAMME FOR AN EMERGING COFFEE HOUSE IN TIMES OF A MARKET SLOWDOWN?

Abstract

A report by Allegra Strategies shows that the UK Coffee house market has performed above expectations, and certainly better than the UK retail sector as a whole, during the recent economic downturn. Coffee house sales in 2009 grew by 6.2% compared to 2008 to reach an estimated 1.63 billion (Coffee Explorer, 2010).

Academic studies, research and case histories have all consistently recognised that it can cost up to five times more to acquire a new customer than to retain an existing one (Pfeifer, P. E., 2005). Also, depending on the nature of the market in which a business is operating, it is possible to increase profits by up to 60% following a reduction of just 5% in customer defection (Reichheld, F. F., 1993).

An effective loyalty programme can result in reduced customer price sensitivity, a lower rate of customer defection, increased referrals and more repeat purchases, thereby reducing business costs and increasing revenue and profits (Page, M. et al, 1996).

There is no universally accepted definition of what constitutes customer loyalty. However, the concept propounded by Dick and Bassu (1994) is widely cited in academic studies. It places emphasis on the role of consumer attitude and behaviour suggesting that customer loyalty should be seen in terms of how strong the relationship is between a consumer's attitude and behaviour towards a product or brand and their incidence of repeat purchase.

Chapter 1 - Introduction and Market Background

This dissertation proposal suggests how the critical examination and analysis should be carried out in relation to the hypothesis propounded on the title page.

Published data shows that 76% of coffee house customers tend to be loyal to their favourite coffee shop (Allegra Strategies, 2008). However, despite the fact that the big coffee house chains have adopted customer loyalty programmes, there is no evidence that these programmes have generated incremental profitable sales. According to Allegra Strategies, the use of loyalty programmes by the big players is simply a reaction to the slowdown of a maturing market (Thomas, J., 2010).

In view of this slowdown any potential new entrant is likely to struggle to gain market share from the established players and it will be increasingly necessary for new entrants to employ sophisticated relationship marketing techniques. Relationship marketing can be defined as 'to efficiently and effectively increase the acquisition and retention of profitable customers by selectively initiating, building and maintaining appropriate relationships with them. (Payne, A. et al, 2006, page 136).

Relationship marketing encompasses a large number of diverse but interrelated marketing disciplines. In view of this complexity, the proposal is to focus on one crucial element of any relationship marketing strategy, namely customer loyalty, with particular reference to the coffee house market.

Chapter 2 - Research Aims and Objectives

The primary aim of the research project is to analyse the behaviour of consumers in relation to their selection and patronage of any particular coffee house outlet. This analysis will be supported by, and corroborated with, customer loyalty data analysis in both the business environment generally and the retail trade sector in particular.

However, the issue of customer loyalty programmes cannot be examined in isolation and it will firstly be necessary to gain an understanding of the various factors that contribute towards loyalty and how they impact on the relationship between an organisation and its customers. This understanding will be acquired through the answers to critical questions which will focus on the following contributory factors to customer loyalty:

  • Consumer attitudes and behaviour.
  • Customer satisfaction in terms of service delivery and product offering.
  • Outlet convenience.
  • Recommendation and referrals by existing customers.

Chapter 3 - Review of Literature in Relation to Research Aims.

Consumer behaviour theorists generally believe that the natural tendency of consumers is to have 'split' loyalties towards brands (Bass, F. M., et al, 1984). Professor Andrew Ehrenberg of London South Bank University supports this view suggesting that the varying behaviour of consumers means that loyalty schemes may not work as intended (Scriven, J., 2006). However, conversely, he also states that loyal behaviour does exist since there is clear evidence that people do buy the same brands repeatedly.

Most theorists in the area of consumer behaviour also believe that consumers make purchasing decisions based, to a large part, on their behaviour and attitudes (Petty, R. E., Unnava, R. H., Strathman, A. J., 1992). However, there is an implicit weakness in examining conceptual models of loyalty that are only behavioural and attitudinally focussed. Recommendation, customer satisfaction, and outlet convenience also have important roles to play (Garland, R. et al, 2004).

Several research studies have concluded that there is a direct connection between customer satisfaction and customer loyalty (Heskett et al., 1993). However, research has also shown that between 60% and 80% of customers who defect to a competitor were actually satisfied with the service they were receiving before they defected (Reichheld, F.F. et al,. 2000). Consequently, whilst customer satisfaction is obviously an important loyalty factor, it may not be as significant as behaviour and attitude.

Also, loyalty may simply result from the location convenience of a particular outlet. In this instance attitude and behaviour may be of marginal or no significance. However, convenience is seen by Bloemer and his research colleagues (1999) as a 'functional' (as opposed to 'emotional') characteristic of loyalty and may not be enduring due to competitive activity i.e. a new outlet opening.

Lastly, the influence of recommendation and referral should not be underestimated. The 'Relationship Marketing Ladder of Customer Loyalty' (Christopher et al, 1991) suggests that customers who have been acquired may then progress, subject to satisfaction, from being simply a customer to an 'advocate' or even a 'partner'. Furthermore, 'Loyal customers repeatedly purchase products or services. They recommend a company to others. And they stick with a business over time' (Prus et al, 1995, p.100)

Chapter 4 - Methodology

Primary research into the area of customer loyalty in the coffee house market is necessary to substantiate, and expand on, the limited secondary data available about the nature and role of coffee house customer loyalty. It will take the following form:

  • Face-to-face interviews with coffee house consumers. These will be performed with customers exiting coffee houses - both chains and independents.
  • Interviews with managers of independent coffee houses.

Following a critical examination of the primary and secondary research findings, the dissertation will provide conclusions and recommendations that will assist an emerging coffee house in making business critical decisions about the viability, nature, role and likely success of customer loyalty schemes.

Chapter 5 - Scope and Limitations

The secondary research will cover the area of customer loyalty generally. However, the primary research will be limited to the coffee house market only in order to fully satisfy the requirements of the hypothesis.

Also, whilst the recruitment of managers in the independent sector is expected to be achievable, it is anticipated that organising interviews with managers of the big chains may prove to be problematic.

Chapter 6 - Resources

In terms of secondary sources, there is a wealth of data available on consumer behaviour, customer satisfaction and customer loyalty in the form of academic research journals and papers and case studies. A number of the conceptual theories and academic studies have been referred to in the literature review in this proposal. In addition there are other dissertations available on the subject of customer loyalty in general but not specifically on customer loyalty in the coffee house market.

The nature of the coffee house market itself is the subject of extensive research and the prime exponent in this area of study is Allegra Strategies. Whilst its reports are available for purchase, they are also frequently cited in journal articles available online. Also, there are market specific websites that cover the coffee industry such as Coffee Explorer (www.coffee-explorer.com).

Chapter 7 - Schedule of Actions

Stage 1

  • Design questionnaire for customer and manager interviews.
  • Research sample of coffee house managers and contact by telephone with written follow up confirming appointment.
  • Carry out secondary research.

Stage 2

Carry out customer and manager interviews.

Stage 3

Analyse research findings and correlate with hypothesis

Stage 4

Draft dissertation using structure as below.

Stage 5

Proofreading of dissertation by author and another individual unconnected with the project.

Stage 6

Final amendments to dissertation.

Proposed Structure for the Dissertation

  • Title Page.
  • Abstract.
  • Table of Contents.
  • Introduction - the main objectives of the research project and general background data on the retail market and coffee house market.
  • Background - summary of the concept of customer loyalty within relationship marketing and an identification of the key constituent parts of loyalty.
  • Research Methodology - the nature of the evidence and data collected and how it has been collected.
  • Literature Review - a review of academic theory, facts and relevant evidence in relation to the concept of customer loyalty and its constituent parts that supports the research premise.
  • Facts, Data and Evidence - a summary of what has been discovered from both primary and secondary research sources and what conclusions can be drawn from it in terms of the hypothesis presented in the title.
  • Conclusion and Recommendations - a general conclusion drawn from the assembled evidence and what course of action should be pursued and by whom.
  • Reference List
  • Appendices - Figures, Graphs, Diagrams

Reference List

  • Allegra Strategies, 2008. 'Latest Trends Impacting UK & European Coffee Shop Market'. < http://www.coffee-house.org.uk/Allegra%20Caffe%20Culture2008.pdf>. Accessed 06.03.10
  • Bloemer, J., de Ruyter, K., and Wetzels, M., 1999. 'Linking perceived service quality and service loyalty: a multi-dimensional perspective'. European Journal of Marketing: volume 33, issue 11/12, pages 1082-1106.
  • Bass, F. M., Moshe M., Givon, M. U. Kalwani, D.R., and Wright, G.P., 1984 'An Investigation into the Order of the Brand Choice Process'. Marketing Science, 3 (4, Fall), pages 267-287.
  • Christopher, M., Payne, A., Ballantyne, D., 1991. 'Relationship Marketing: Bringing Quality, Customer Service and Marketing Together' Butterworth-Heinemann, Oxford, page 22.
  • Coffee Explorer, 2010. 'Project Caf9 UK'.< http://www.coffee-explorer.com/en/coffee-press-news-articles/coffee-news-articles/4183-project-cafe9-uk-.html>. Accessed 04.03.10
  • Dick, A.S. and Bassu, K., 1994. 'Customer Loyalty: Toward an Integrated Conceptual Framework'. Journal of the Academy of Marketing Science, Vol. 22, No. 2, pages 99-113.
  • Garland, R. and Gendall, P., 2004. 'Testing Dick and Basu's Customer Loyalty Model'. Australasian Marketing Journal. . Accessed 04.03.10
  • Heskett, J. L., Jones, T. O., Lovemann, G. W., Sasser, W. E. jr., and Schlesinger, L. A. 'Putting the Service-Profit Chain to Work'. Harvard Business Review, 1994, Vol. 72, Issue 2, pages 164-174.
  • Page, M., Pitt L., and Berthon, P., 1996. 'Analysing and reducing customer defections'. Long Range Planning, Volume 29, Issue 6, December 1996, pages 821-834.
  • Payne, A. and Frow, P., 2006. 'Customer Relationship Management: from Strategy to Implementation'. Journal of Marketing Management, 2006, 22, pages 135-168.
  • Petty, R. E., Unnava, R. H., Strathman, A. J., 1992, Theories of Attitude Change, in Robertson, T. S., and Kassarjian, H. H., (ed.), Handbook of Consumer Behaviour, pp. 241 -280, Prentice Hall, New Jersey
  • Pfeifer, P. E., 2005. 'The optimal ratio of acquisition and retention costs'. Journal of Targeting, Measurement and Analysis for Marketing, Volume 13,Number 2, Palgrave Macmillan, pages 179-188.
  • Prus, A. and Brandt, R.D., 1995.'Understanding your customers', Marketing Tools Magazine, July-August 1995, page 100.
  • Reichheld, F. F., 1993. 'Loyalty-based management'. Harvard Business Review, Volume 71, Issue 2, pages 64-72.
  • Reichheld, F. F., Markey, R. G.; and Hopton, C., 2000. 'The loyalty effect - the relationship between loyalty and profits': European Business Journal 2000, pages 134-139.
  • Scriven, J.,2006. 'Answering fundamental marketing questions'. <http://www1.lsbu.ac.uk/busehrenberg/documents/AnsweringFundamentalMarketingQuestions.pdf>. Accessed 06.03.10
  • Thomas, J., 2010. Marketing Magazine. 'Costa Coffee rolls out customer loyalty card' <http://marketingmagazine.co.uk/news/987402/Costa-Coffee-rolls-customer-loyalty-card/>. Accessed 07.03.10

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